January 13, 2011

Karat Top

In the summer of 1932, Louis McFadden, a former bank president turned Pennsylvania Congressman, stood up on the House floor to reveal a sinister plot. Over the course of a 25-minute speech, he explained how the Federal Reserve—“one of the most corrupt institutions the world has ever known”—was being steered by a cabal of European bankers who had, among other sins, paid for Leon Trotsky’s return ticket to Russia and funded the October Revolution. But McFadden’s pleas to dismantle the Fed and embrace gold (in his view, “the only real money”) were greeted with ridicule. One fellow Republican joked that his poor colleague must be suffering from some sort of “violent disease”—one that “warps the judgment” and “narrows the vision.”

Eighty years later, however, the quest to take down the Fed and revive the gold standard is harder to laugh off. Already this year, in Georgia, a Republican state legislator, Bobby Franklin, has put forward a bill that would require all state residents to use gold and silver coins to pay their taxes—and it has gained surprising support. In Utah, another legislator has proposed allowing residents to mint their own coins and conduct state business with gold. Virginia delegate Bob Marshall is backing the study of a new state currency, as a fail-safe “in the event of a major breakdown of the Federal Reserve System.” (The last time Virginians had an official currency other than the dollar was during the Civil War.) Similar proposals are sprouting up in Montana and Idaho, all with the same goal—to free the states from the Fed, which, many gold bugs contend, has been eroding the value of the dollar and laying the groundwork for ruinous inflation.

If there’s an architect of this new state strategy, it’s William Greene, a 46-year-old conservative activist and founder of RightMarch.com, which he built to “counter the well-financed antics of radical left-wing groups like MoveOn.org.” Two years ago, Greene, who has a Ph.D. in theology and teaches part-time, was reading the Constitution aloud with students at Georgia’s Gainesville State College when the class stumbled over Article 1, Section 10: “No state shall ... make any Thing but gold and silver Coin a Tender in Payment of Debts.” The idea hit Greene: What if residents in states like Georgia had to pay their taxes in gold and silver? Businesses and individuals would then have to start stockpiling gold and silver in their bank accounts. As the price of gold rose (as, he reasoned, it inevitably must) and the dollar’s value fell, Georgia’s gold-funded budget would find itself on solid footing. People from other states would flock to Georgia’s banks to open their own gold accounts. Eventually, the masses would rebel against paper money. “At that point,” Greene explains, “the Federal Reserve system will have become unwanted and irrelevant, and can be easily abolished.”

And so, in 2009, Greene took his idea to the Georgia legislature, where it earned a hearing in the banking committee, and drummed up interest from a number of legislators—over the frantic objections of local banking officials. Lately, Greene has been talking to other states, including a task force in Idaho, about his idea. “Going at this from the state level has a much higher chance of success in terms of the eventual elimination of the Fed,” he says.

There are towns and regions of the United States that have already created their own alternatives to the dollar. Historically, though, these have tended to be earnest schemes associated with the left, as a way to counter the relentless pace of globalization. In the 1990s, for instance, Ithaca, New York, introduced the Ithaca HOUR, worth about $10, which can be offered in exchange for an hour’s work and redeemed at local businesses; the Berkshires in Massachusetts has a similar form of local tender, called Berkshares. More than 50 towns have also experimented with the idea of time-banking, in which people can barter their time for services—say, giving rides to the elderly in exchange for goods. “These have largely been efforts by activists to build communities and help the economically marginalized increase their purchasing power,” says Ed Collom, a sociologist at the University of Southern Maine.

On the right, however, the alternative currency cause has often been seen as a way to end the Fed’s monopoly over the money supply. During the 1990s, this fixation was most often associated with the black-helicopter crowd. In 1998, an Indiana-based firm originally known as NORFED (the National Organization for the Repeal of the Federal Reserve Act and the Internal Revenue Code) allowed people to trade in their money for gold and silver “Liberty Dollars.” In 2007, the FBI raided the firm’s mint in Coeur d’Alene, Idaho, and the company’s founders were later charged with fraud and running an unlawful coin operation. More recently, Tea Party groups have taken up the cause, along with other luminaries on the right: Glenn Beck, for one, urges his viewers to buy gold as a hedge against economic collapse.

Granted, a switch from greenbacks to gold along the lines of Greene’s proposal would encounter a few problems. For one thing, there may not actually be enough gold and silver coins in circulation to satisfy the newfound demand. (Greene says he hopes Congress will investigate why the U.S. Mint periodically stops issuing such coins.) In addition—as economists have long pointed out—a country on the gold standard can’t fine-tune its monetary policy to adjust to domestic conditions. Economic historians tend to argue that America’s sluggishness in abandoning the gold standard in the 1930s helped deepen the Great Depression. Not only that, but a gold standard would pin the inflation rate to erratic factors like the rate of gold mining in Russia and South Africa.

Nevertheless, thanks to the combination of conservative fear-mongering and the lingering effects of the recession, anti-Fed mania has migrated from the fringe to the mainstream. “It’s really the perfect storm,” says Greene. Ron Paul, one of Congress’s most famous Fed antagonists, now chairs the House subcommittee on monetary policy. Top Republicans—including John Boehner and Mitch McConnell—have criticized the Fed’s quantitative easing strategy to fight the recession, while others have called for an end to its “dual mandate” to tackle both inflation and unemployment (these conservatives would rather the Fed focus only on tamping down inflation). Perhaps the clearest sign that anti-Fed forces have gained more ground than ever before is that the Fed itself is taking them seriously. Recent Fed minutes show officials rethinking their communications strategy in the wake of the attacks on their credibility. One former Fed governor, Frederic Mishkin, told CNBC, “The Fed can recover from this. ... But boy, they’ve got a lot of digging out of the hole right now.” The central bank has even hired a former Enron lobbyist, Linda Robertson, to beat back the onslaught up on the Hill. A return to the gold standard may not be imminent, but it’s no longer a world in which Louis McFadden would be laughed right off the House floor.

Bradford Plumer is an associate editor for The New Republic. This article ran in the February 3, 2011, issue of the magazine.